I just finished taxes for 2017 and due to semi-retirement qualified for the opportunity tax credit. I noticed that the phase-out is very steep, and what this means is that your actual marginal tax rate INCREASES during the phase out interval (as it does for other phaseouts such as alternative minimum tax exemption.) How much? it turns out a LOT.
For my situation for upcoming 2018, the threshold for the tax credit phasing out is $160,000 AGI for a couple. This will likely put you in the 22% bracket for taxable income. I will have 2 kids in college this year for a potential tax credit of $5000. Based on the large amount of the credit, and the steep phaseout from 160,000 to 180,000, for every dollar over 160,000 AGI, my incremental tax rate will be 47% in the interval from 160 to 180 thousand. For one kid, 37.5%. As you earn more over 160,000 a very generous gift is being taken away if you have spent the tuition dollars to qualify for the maximum credit (4000 for one kid, 8000 for two).
This alters my planning for this coming year to try to as hard as possible to keep my AGI under 160,000. This means maximizing retirements, shifting income, minimizing taxable IRA withdrawals and spending my after-tax cash instead. For those who can control their income around this phaseout amount, it is very worthwhile to reduce AGI down to as close to 160,000 as possible. Please offer correction if my math is wrong but I think it is good. Although the marginal tax rate is really that high in the phase-out interval, also keep in mind that because below the threshold my calculations INCLUDE the full opportunity tax credit, your AVERAGE tax rate below the threshold is very low due to the inclusion of the tax credit. Still worth it to get AGI down.